[EN] The environmental organisation Greenpeace International has confirmed in its press release of 15 June 2014 that it has lost 3.8 million euros on the international currency market. According to the Amsterdam-based nonprofit organisation an employee entered into contracts to buy foreign currency at a fixed exchange rate while the euro was gaining in strength. This resulted in a record loss when closing accounts at the end of last year.
1. Did Greenpeace act as a speculator or did they just fail in their hedging strategy?
When reading the press one may get the perception that the investments of Greenpeace may not be in line with their ideals since it seems to be common sense that everything linked to financial instruments belongs to the world of speculation. It is, however, important to always distinguish speculators from organisations investing in financial markets to cover their financial risk exposure on the physical market (hedging).
- Hedgers reduce their risk by taking an opposite position in the market to what they are trying to hedge. The ideal situation in hedging would be to create one effect to balance another. Financial risk management creates stability and helps the organisation to secure its margins. Find more information here.
- Speculators make bets on rising or declining markets. Speculators are not interested in bull or bear markets and are thus vulnerable to both the downside and the upside of the markets. Therefore, speculation can be extremely risky. For example, if a speculator believes that a commodity is overpriced, he may sell it without even owning it and wait for the price to decline, at which point he or she will buy back the stock and realise his profits.
Even though we do not have more details on the financial instruments involved in this particular case, it is likely that Greenpeace did not act as a speculator but just failed in their attempt to hedge their Euro positions.
2. Why does it make sense for Greenpeace and other NGOs to invest in financial markets?
Financial instruments are not only used by speculators but also by organisations to secure multiple financial risks. Greenpeace officials have explained that its finance team frequently conclude contracts to hedge euro positions against currency fluctuations since the organisation is funded with many different currencies and valuations may change rapidly. This problem of volatile currencies is applicable to all NGO who receive a disproportionate amount of donations from Europe which is then redistributed in different currencies to other countries.
The following illustration shows the need to secure FX positions in international NGOs:
By using adequate financial instruments, NGOs (as well as any other organisations) can cover their financial assets against this scenario and protect their budgets. However, this action requires a good knowledge of the risk exposure (considering all positions and correlations), an adequate understanding of the hedging strategies, an appropriate risk management policy (including procedure and thresholds) and an independent analysis of the different hedging offers in the market. By omitting one of these key elements the wrong financial instrument could be selected and thus the risk of losses increased.
3. Why is independent expertise so essential before hedging currency positions?
After this incident, the management of Greenpeace International indicated that the staff member involved thought he was acting in the best interest of the organisation but did not fully understand the nature of the operations and even if he was a senior member of their finance unit he made a serious misjudgment. In addition, he neither respected internal procedures in place nor requested support of an external and independent expert before contracting the financial instruments.
It is, however, important to remember that INDEPENDENCE of an expert (or consultant) is a prerequisite when analyzing any kind of risk mitigation. “Independent” need to be understood in two ways:
- Independent means “external specialist“: external specialists have treated similar issues in many different scenarios and environments. They will bring the appropriate knowledge and expertise to your organisation to ensure the implementation of efficient risk mitigation strategies.
- Independent means “100% independent“: brokers, insurance companies, banks or other companies providing financial instruments follow rather their objectives to sell financial products than providing advice. It is, therefore, recommended to assess the risk exposure by contracting experts who focus on customized advice instead of costly financial products.
Taking the example of Greenpeace, we can see that hedging currency risks with financial instruments can bring tangible benefits to the organisation. However, the associated risk need to be covered by an ethical code of conduct which avoids a repetition of similar scenarios. Bringing independent expertise into the organisation should be the first step to regain confidence of Greenpeace supporters and donors.
DMO, 16 June 2014
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